The Early Railroad Giants And Wall Street
( Originally Published 1939 )
POSSIBLY the greatest battle ever waged in railroad history, and which manifested itself on the floor of the New York Stock Exchange, was the battle between James J. Hill and Edward H. Harriman, for control of the Northern Pacific.
Hill, whose name became synonymous with railroads, was born near Guelph, Ontario in 1838. He began life as a clerk in the office of a firm of river steamboat agents and shippers, but his vaulting ambition soon started him in business for himself, and, ere long, he was the agent for a large line of river packets.
Hill was not the type to stand still. The fires of ambition burned deep in his soul, and after several years as a shipper's agent, he founded his own river lines with steamers plying on the Mississippi and Red River.
With the operation of his own lines, he effected a traffic arrangement with the Saint Paul and Pacific Railroad, but the road which was badly managed failed. It was regarded as a white elephant and no one seemed to want it. Hill, however, with his keen perception, was convinced he could make it pay. He interested Donald A. Smith (Lord Strathcona), and George Stephens (Lord Mount Stephens), and other Canadian capitalists in the bankrupt road, as well as in the great wheat country of the Red River valley.
With their aid he reorganized the railroad as the St. Paul, Minneapolis and Manitoba, and in 1883 he became its president. Hill did not stop at merely being a railroad president. He was a pioneer and builder! What good were railroads without people he reasoned. He employed publicity men and created a huge publicity campaign, extolling the virtue of the great north-west. Settlers flocked there by the thousands, and Hill helped them to build towns, create banks and credit facilities.
In the short span of ten years, after he had become the president of the St. Paul, Minneapolis and Manitoba, he had acquired the Great Northern and Northern Pacific Railways. The House of Morgan became interested in the young railway giant and aided him in his financing.
The Union Pacific had built out from Omaha, some years previous, to meet the Central Pacific which had been built from San Francisco, thus forming the first railway span across the continent. Had it not been for this the history of western roads may have been written differently.
Edward H. Harriman had secured control of the Union Pacific by 1900, and with that he cast an envious eye towards the Chicago, Burlington and Quincy, a road which the Hill interests also wanted. Unlike Hill, who had been born a poor boy, Harriman had started life with many advantages, and though he was a fighter, he had never known the fight of poverty. He served his apprenticeship in finance as a broker clerk, in a stock broker's office in Wall Street, but at an early age, he acquired a seat on the New York Stock Exchange. His friendship with Stuyvesant Fish, who was vice president of the Illinois Central, brought him to the road's board of directors in 1893. When Fish became President, in 1897, Harriman succeeded him in the vice presidency which was created.
From then on, Harriman rose with meteoric speed in the rail-road world. He brought the Union Pacific out of bankruptcy, secured control, and by 1901, he controlled a number of other roads including the Southern Pacific.
In the creation of his vast combination, he had anticipated se-curing the Burlington, but the Hill and Morgan group stole a march on him and purchased the Burlington through its board of directors.
While Hill was allied with the Morgan group, Harriman had lined up with Kuhn, Loeb Company, Morgan's foremost competitors, and when they found themselves defeated in their efforts to control the Burlington, they decided if they couldn't buy the cream, they'd buy the cow. So they set about to acquire the North-ern Pacific, which in turn controlled the Burlington.
The Northern Pacific at that time was capitalized with eighty million dollars in common stock and seventy-five million dollars of preferred, of which amount the Hill-Morgan group held thirty-five million dollars of its common.
With the greatest secrecy, the schemers set about accumulating stock, and within three months they had acquired thirty-seven mil-lion dollars of the Northern Pacific's common, and forty-one million dollars of its preferred. One thing, however, the schemers were not aware of; the preferred stock they had purchased was retirable at the option of the Northern Pacific's board any time prior to 1902. This was the joker which upset their plans. As soon as the Morgan crowd learned of their opponents common stock position, they went into the market to buy 100,000 shares, or more, of common, at the market. The price went up and -up; 110, 115, 120, 125, 135, 145, 149, nevertheless, they kept buying and buying until they acquired what was needed. When they had secured this, the board of directors of the Northern Pacific immediately authorized the redemption of its preferred stock. This redemption left them in control. However, it created a condition never before known in the history of the Street. The short interest could find no stock to cover with. The Kuhn-Loeb crowd wouldn't sell, and neither would Morgan. Between them, they held seventy-two million dollars of the company's eighty million common stock capitalization. Morgan had bought one hundred thousand shares in the market and someone had to deliver.
On May 9th, 1901, the great corner in Northern Pacific occurred. There had been no excitement like it since Jay Gould broke his own gold market, on the Gold Exchange, on September 25, 1869. All sales for Northern Pacific were cash, meaning delivery the same day. No stock was available. The market opened at 170 and within a few minutes passed 200. Call money jumped up to sixty percent. A cash sale came out at 300. Bidding became furious! 350 was offered, 400, 450, 500, 600, 700, and finally, in desperation, stock was bought at $1,000 per share.
In the furious struggle of trying to cover, liquidation started. The Blue Chip stocks dropped over fifty points and some even seventy-five. The two groups had not intentionally brought about this corner, which was ruining the market, and neither were they anxious to press the shorts. A truce was declared, and, before the market closed, they announced they would lend the short-interests enough Northern Pacific to cover their sales, pending a fair settlement. The market immediately rallied with this news. Call money went back to normal, and the following day Morgan and Kuhn-Loeb agreed to let the shorts cover at 150. This ended the greatest contest for railroad supremacy ever recorded on the floor of the stock exchange.
Both Hill and Harriman were giants in their chosen field, and, more often than not, down through the years, the Stock Exchange arena was the scene of their battles. From 1880 to 1900, during the time these two giants were struggling, the country added approximately one hundred thousand miles of railroad track to her facilities. Virgin country of field and forest, mountain and plain, slowly gave way to the iron ribbons which gripped the fertile soil, and added towns and factories to the mighty nation.
At times, Harriman's tactics were said to be not unlike those of Jay Gould's, and in 1907 he was severely denounced by Theodore Roosevelt. Nevertheless, both Hill and Harriman contributed materially to the great nation which is ours.